When start-ups need to grow up

When start-ups need to grow up

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Young, agile and innovative, the start-up is everything that is exciting about modern business. The Kauffman Foundation estimates that one in every five jobs in the US is created by start-ups. Companies such as Airbnb, Facebook and Uber are seen, for good or ill, as the corporate titans of our age.

Between 50-90 percent of start-ups fail – usually, according to Fortune, because people don’t want the products or services they offer – but the survivors must adjust to changing expectations. As Emmanuel Faber, CEO of Danone, said in KPMG’s 2017 Global Consumer Executive Top of Mind survey: “There are things that consumers tolerate from smaller brands that they wouldn’t from other brands. When I say ‘consumer’, the reality is that all the stakeholders, including regulators, are inclined not to look closely at smaller brands, but as soon as it grows, it starts to face the same problems as bigger brands. Take class actions. You’d never get a class action if you are a $20m company in the US, but as soon as you become a $500m company, you can be a nice brand but you still get the class action.”

Uber’s travails have been well publicized but in essence it probably suffered because it didn’t develop some of the back-end functions – eg HR departments that worry about culture or a marketing department to make sure consumers are aware of your product – that established firms accept as the price of doing business. The founders of failed French web content start-up Dijiwan realized this, noting that: “A good product idea and a strong technical team do not guarantee a sustainable business. One should not ignore the business process.”

Uber is trying to manage its crisis, with a change program, a new performance management process, a continued commitment to innovation (eg the launch of a helicopter-hailing service in Brazil) and a new CEO – former Expedia boss Dara Khosrowshahi replacing Travis Kalanick.

Kalanick’s resignation highlights a thorny issue for many start-ups: when should the founder move on? On average, by the time a successful venture is three years old, only 50 percent of founders remain as CEO – and less than one in four of those go on to lead their company’s IPO. As most founders believe their firm won’t perform when they’re gone, this change is often forced by investors who decide the entrepreneur doesn’t have the skills required to be CEO of a big business.

It’s a tough call to make. The shift to a more professional, process-driven culture may alienate long-serving staff who preferred the “Wild West feeling of a start-up”, as one veteran put it, and see new managers as a threat to their prospects.

As start-ups grow, big ideas can be less critical than small details. Fearing that room-sharing service Airbnb would harm the hotel trade and short-term lets, city authorities in New York, San Francisco, Barcelona and Berlin launched legal challenges. Airbnb then updated its terms of service to inform users about local laws. Sometimes, it collects hotel taxes for cities. “Any government can shut you down, so you have to play the regulatory game,” says Gerald Faulhaber, Professor of Business Economics at the University of Pennsylvania.

You can’t launch a successful start-up without immense self-belief. Yet founders must stay grounded enough to confront brutal realities and to recognize when they need help. As Bill Gates said: “Success is a lousy teacher. It seduces smart people into thinking they can’t lose."

Also in this issue of ConsumerCurrents

The power of touch: Shoppers are more likely to purchase a product they've held in their hands

Metro: Metro CEO, Olaf Koch, on how local decision making drives the company forward

Connected homes: What do consumer companies need to know about the smart home revolution?